President Donald Trump has announced plans to impose tariffs of up to 25% on Canadian imports as early as February 1st, marking a significant departure in U.S. trade policy and posing a serious challenge to Canada’s economy. In light of this development, and Canada's plans to retaliate, it’s imperative for both Canadian and American organizations engaged in cross-border trade to act now to assess the potential impacts, safeguard their interests, maintain business continuity, and mitigate financial risks.

This guide identifies the primary risks posed by the proposed tariffs and outlines practical strategies and proactive measures organizations can take to prepare for the potential changes ahead.

Background

Tariffs, a well-established tool of trade policy for governments, have recently moved into the spotlight. Before President Trump came into office, he widely communicated his intention to swiftly impose a 25% tariff on all Canadian goods imported into the United States, citing border security concerns.

Despite measures taken by Canadian officials aiming to prevent the imposition of the tariffs, since President Trump’s inauguration on January 20, 2025, he has doubled down on the threat. While he stopped short of imposing the threatened tariffs on Canada on his first day in office, he publicly stated on inauguration day that he planned to put the 25% tariffs in place against both Canada and Mexico on February 1.

On his first day in office, President Trump also ordered a large-scale investigation into United States trade, aimed at implementing an “America First Trade Policy.” Matters identified for investigation include existing and potential new measures to address trade deficits in goods and alleged fentanyl flows from Canada, and the impacts of the Canada-United States-Mexico Agreement (CUSMA). These echo issues President Trump has cited in public comments as justification for the threatened 25% tariffs on Canadian goods.

In response to President Trump’s threats, Canadian government officials have promised to implement robust retaliatory measures should the tariffs be imposed. Measures being prepared include retaliatory tariffs on a wide range of United States goods. Targeted retaliatory tariffs have been implemented by Canada in the past to respond to tariffs imposed by the United States. As in the past, the Canadian government is preparing the list of United States goods that will be made subject to retaliatory tariffs carefully and incrementally so as to ensure the measures will have targeted and effective retaliatory impact, while, where possible, avoiding jeopardizing supply chains for critical imports required by Canadians.

This looming trade war has justifiably sparked widespread concern from Canadians, federal and provincial governments, and economists alike about the detrimental impacts these measures will undoubtably have on integrated supply chains, Canada’s economy and businesses on both sides of the border. For decades, businesses in Canada and the U.S. have benefited from a close trade relationship, supported by agreements like NAFTA and its successor, CUSMA. However, this heavy reliance exposes companies to significant risks whenever trade policies shift or political dynamics change. This trade war can be expected to throw these risks into stark relief.

With the February 1st date for possible tariff imposition rapidly approaching, organizations need to take action now, to understand the impacts the tariffs will have on their organization, protect their interests, ensure business continuity, and minimize financial strain on their organizations. Below, we outline the key strategies and proactive steps organizations can take to prepare for U.S. tariffs and Canada's retaliatory measures.

Key actions to prepare for tariffs

1. Understand how tariffs work

  • Canada

In Canada, under the Customs Tariff, Cabinet has the legal power to impose tariffs (also known as surtaxes) for the purpose of responding to acts, policies or practices of other countries’ governments that adversely affect, or lead directly or indirectly to adverse effects on, trade in Canadian goods or services.

In addition to imposing tariffs, Cabinet has other powers at its disposal, including the ability to order the suspension or withdrawal of rights or privileges granted to the United States under a trade agreement, such as prohibitions on export restraints.

Tariffs are administered by the Canada Border Services Agency (CBSA). Duties normally are imposed on specific goods based on their tariff classification, and are payable by the importer of record of the goods. Surtaxes, if imposed, would be applied on top of any customs duty that is otherwise applicable to the product based on its tariff classification and tariff treatment (determined by the origin of the product). The total amount payable in duties as a result of a surtax is a function of applying the percentage duty rate and percentage surtax to the declared value for duty. Then, GST (and any provincial tax) payable is calculated on the aggregate of the value for duty plus applicable duties (which include surtaxes) and excise taxes.

What this means is that a commercial product with a value for duty of $100 to which a 25% surtax is applied will result in duties and GST of $31.25 (nearly a third of the declared value of the product).  Assuming the importer of record is GST registered in Canada, the GST paid should be recoverable in most cases. However, there may be scenarios where the importer of record cannot recover the GST even if it is GST registered. It is therefore very important to review the application of duties and applicable sales tax and any available exemptions concurrently.

  • United States

Tariffs imposed by the United States against Canadian goods normally will fall on the importer of record into the United States. It is important to recognize that, like in Canada, the importer of record may not always be a resident U.S. company, and some Canadian companies who export goods to the United States and also act as the importer of record will be liable for the duties.

There are a number of tariff-making authorities available under United States law. Some available legal avenues require greater procedural steps be taken in advance of their imposition, such as investigations and determinations by U.S. government authorities. Others can be exercised unilaterally by the president.

The national security-based rationales (ie. fentanyl and border “crises”) President Trump has cited in his threats to impose tariffs on Canada make it probable that these measures will be imposed under the International Emergency Economic Powers Act (IEEPA). This is significant as, unlike the other trade statutes the United States has used to impose tariffs on Canada in the past, under the IEEPA, tariffs can be imposed without any process if the president declares a “national emergency” with respect to an “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.”  A standard for such a “national emergency” is not prescribed in the statute.

Recent tariffs ordered by President Trump on imports from Colombia may offer a potential preview of how the tariffs the United States imposes on Canada will operate. On Sunday, January 26, 2025 President Trump ordered immediate 25% tariffs on all goods from Colombia, increasing to 50% the following week, after the country refused to receive U.S. military planes carrying deported immigrants until the U.S could guarantee “dignified conditions.”

The White House confirmed that the measures would have been imposed under the International Emergency Economic Powers Act (IEEPA). The cited “national emergency” was that the “denial of [the] flights ha[d] jeopardized the National Security and Public Safety of the United States.” Other measures ordered included a travel ban, visa revocations and sanctions on Colombian government officials. President Gustavo Petro of Colombia subsequently ordered his government to increase tariffs on U.S. goods by 25% in retaliation.

The United States and Colombia came to an agreement regarding the acceptance of deportation flights prior to the measures’ implementation, and the tariffs and sanctions were “held in reserve.” However, the situation communicates important takeaways to other countries, like Canada, against which the U.S. has threatened tariffs. In particular, it demonstrates that the standard for “national emergency” under the IEEPA is being interpreted broadly by the current administration. Further, Colombia, like Canada, is a free trade agreement partner of the United States. This demonstrates that, in the immediate term, free trade agreements are unlikely to protect any trading partners of the U.S. from vulnerability to tariff measures.

2. Understand the key risks for your organization as a result of the tariffs and delayed response

  • Increased costs of goods: If tariffs are imposed on imported goods on both sides of the Canada-U.S. border, prices of goods imported into and exported from both countries will rise dramatically. This will also have contractual implications that must be taken into account. Under any contract for sale of goods between the two countries, this will substantially increase the costs to be borne by the party responsible for payment of import duties and taxes, and have a detrimental impact on the overall value of any contracts that were entered into under more favourable trade and economic conditions. Who is responsible for the payment of duties and taxes on imports under your contracts? Do the contracts have provisions that apportion liability or protect the parties from these financial risks? Have you explored available legal options to mitigate impacts?
  • Missed opportunities: Certain opportunities to exempt your organization’s goods from the application of the tariffs are only available through proactive action. Failure to take proactive and prompt steps to participate in the Canadian government’s structuring of retaliatory measures, explore exemption and drawback opportunities, or re-structure supply chains in advance of the tariffs being imposed, may result in unnecessary financial losses. In particular, Canadian government officials are currently seeking input from Canadian organizations on the retaliatory tariff list, and seeking specific examples of challenges and difficulties that may be associated with U.S. and Canadian tariffs for supply chains, both in terms of goods flows to the U.S. and import of U.S. goods into Canada. The time to provide that input is now.
  • Single-source supply chain disruptions: The United States remains Canada’s largest and most important trade partner. However, the shifting political and economic landscape highlights an undeniable truth: diversification is no longer just a strategic advantage—it’s a necessity. Over-reliance on the United States as a source for critical goods and inputs exposes organizations to risks tied to unilateral policy changes or tariff increases that can be mitigated through a diverse portfolio of trade partners in less impacted markets. Are there opportunities for your organization to avoid or minimize the impacts of the tariffs through diversification of supply chains to modify the legal origin of imported goods?

3. Assess risks and rights under contracts with vendors and customers

Tariffs will cause the cost of goods to rise on both sides of the U.S.-Canada border. The financial impact the increased cost of goods will have on your organization may depend on the contractual terms and the protective clauses included in your agreements. Do your contracts protect you from these financial risks?

Some industries (such as large infrastructure and automotive manufacturing) have more experience with the threat of tariffs and have developed contractual mechanisms for allocating known risks, such as liability caps and cost sharing arrangements, and renegotiating these arrangements in response to new tariffs, taxes, duties or change of laws. Expect such mechanisms to become much more standard across all industries. With time, there will also be clearer demarcation of the risk-taking party in contracts.

  • Review protective clauses: Examine existing contracts with vendors and customers to determine what recourse you may have to minimize the financial impact of the increased cost of goods. Proactive review of your tariff-related rights and obligations under existing agreements will help with understanding the likely impacts of the tariffs on your organization, and help you prepare to defend your interests in response to requests from vendors and customers regarding tariff responsibilities and potential cost-sharing mechanisms. Clauses to look for include:
    • Terms of trade: Who is responsible for importing the goods and payment of duties and sales and excise taxes on import? Do your agreements permit amendments that might allow your organization or a counterparty to seek to renegotiate the agreement to share or shift the tariff burden? How and under what conditions can this right be exercised?
    • Change of law and price adjustment: Do your agreements have change of law clauses that allow for contract price adjustments? Can these rights be exercised when new tariffs are put in place? Does the agreement limit the scope of permissible contract renegotiations or price adjustment? How and under what conditions can this right be exercised?
  • Prepare for renegotiation of contracts: Is your organization ready to exercise its contractual rights, or respond to requests from counterparties? Consider proactively preparing your negotiating position.
  • Insurance and hedging Instruments: Consider the use of specialized insurance products now. As tariffs may be imposed by the U.S. quickly and without warning, on goods imported from any country, specialized insurance covering key risks such as trade credit insurance or currency hedging should be considered as soon as possible.

4. Explore inventory and supply chain management strategies to minimize trade in goods subject to tariffs

The rising costs of goods from United States sources as a result of Canada’s retaliatory measures will require certain organizations to re-evaluate their supply chain strategies. If your critical input currently sourced from the United States is now 25% more expensive, do you have other options? Can it be sourced from other suppliers not impacted by the tariffs?

By reviewing high-risk supply chains, managing inventory and re-structuring supply chains strategically in advance of tariffs being imposed, the impact of tariffs may be mitigated.

  • Inventory and origin tracking: If you have to prove that your product “originates” in a particular country in order to avoid tariffs, do you have the documentation you need do it?
  • Diversification and alternative sourcing: Explore whether key goods, particularly critical inputs affected by the tariffs, can be sourced from other countries not subject to actual or threatened tariffs. In anticipation of retaliatory tariffs being imposed by Canada against the United States, explore sourcing equivalent inputs from countries other than the United States to avoid increased costs. Diversifying your supply chain for these inputs can reduce dependency on regions most heavily impacted by tariffs. However, diversification needs to be done strategically. Keep in mind that, based on Canada and U.S. policy priorities, certain regions outside the U.S. and Canada may attract even higher tariffs (i.e. Chinese-origin goods).
  • Stockpiling: Determine whether finished goods intended for the US market can be exported to and stockpiled in the U.S. in advance of the tariffs being imposed, to mitigate immediate impacts for customers. Prior to Canadian retaliatory tariffs taking effect, consider stockpiling finished goods or critical inputs from the United States in Canada.

5. Review overall trade compliance to minimize duties payable

A review of your organization’s overall trade compliance will allow you to identify opportunities to minimize the financial impacts of the tariffs.

For a given import, the application of the tariffs, and the amount payable in duties as a result, depends on the origin and value of the imported goods, which must be declared at the time of import. When higher tariffs are imposed on goods from a specific country, it is more critical than ever to ensure origin and valuation are declared accurately to avoid overpayment of duties and minimize the tariffs’ financial impact for your organization.

  • Verify the origin of goods: Verify the actual origin of imported and exported products to ensure compliance with applicable trade regulations. Determine whether the origin of goods can be modified by sourcing certain inputs and components elsewhere.
  • Explore valuation strategies: Explore strategies to minimize tariffs through accurate valuation. Once tariffs are in place, the declared value of goods on import will become an important factor influencing the cost of goods. While there may be options available to compliantly reduce the value for duty of goods, be mindful of customs and tax obligations. The value for duty is normally based on the price paid or payable for the goods in the context of the cross border transaction. Restructuring the sale so that the goods are sold intercompany at a lower price paid or payable may decrease the value for duty and therefore the duties payable. However, the price must remain arm’s length and customs and tax authorities will apply specific conditions before allowing the intercompany price to be used as the basis for the declared value for duty.

6. Consider availability of and eligibility for tax deductions

Tariffs paid by organizations on imported goods may be tax deductible in certain circumstances. Leveraging available tax deductions should be a critical element of your tariff-response strategy.

  • Raw materials and goods for resale: In calculating the taxable income of a business, tariffs paid by the organization on raw materials or goods imported for resale in the country should be included in the costs of goods sold, and taken as a deduction.
  • Capital assets: Alternatively, if the imported product is a capital asset, the amount paid in tariffs should be added to the amortization class and an amortization deduction could be claimed. Certain products may qualify for accelerated amortization treatment.
  • Business expense tax credits: The tariffs paid by a business may also be included in expenses that qualify for other tax credits such as scientific research and experimental development (SR&ED) credits, or manufacturing tax credits.
  • Allocate tariff-related risks and liabilities with tax implications in mind: Available deductions make it clear that, first, the “net after tax” impact of the tariff should be used for risk allocation purposes. Second, to the extent allowed by transfer pricing rules, where there are transactions between related parties, the payor of the tariff should be the one that is best placed to claim the expenses against taxable income in the importing jurisdiction.

7. Engage in advocacy efforts

In this period of change in United States and Canadian trade policy, there are current and ongoing advocacy opportunities for organizations on both sides of the border to proactively have their voices heard and influence policy decisions.

  • Government consultation processes on Canadian retaliation targets: Canadian federal and provincial governments are currently considering retaliatory measures against United States tariffs. Canadian companies can advocate for less costly and more strategic retaliation targets, including by providing details on the practical implications of the proposed retaliatory measures for Canadian businesses.

    In particular, the Canadian government is currently putting together the list of United States goods that will be made subject to retaliatory tariffs. This process is being done carefully and incrementally so as to ensure the measures will have targeted and effective retaliatory impact, while also, where possible, avoiding jeopardizing supply chains for critical imports required by Canadians. Canadian government officials are currently seeking input from Canadian organizations on the retaliatory tariff list, including specific examples of challenges and difficulties that may be associated with U.S. and Canadian tariffs for supply chains, both in terms of goods flows to the U.S. and import of U.S. goods into Canada. Participating in consultations provides organizations with an opportunity to shape the Canadian government’s domestic and foreign response to U.S. tariffs, but it must be done proactively. Our Gowling WLG professionals are prepared to address these issues with you.

  • Industry and cross-border collaboration: Collaboration with other organizations may provide further opportunities to influence policy. Opportunities include engaging with industry associations to present a unified stance, and working with customers on the other side of the border from your organization to encourage them to advocate against the tariffs with their own government. Providing United States customers with data and arguments they can leverage to strengthen their case may increase the impact of those efforts, and potentially help influence policy decisions across the border.

8. Pursue exclusions and exemptions

While blanket tariffs have been threatened, governments are capable of authorizing exclusions and exemptions from the measures or granting remission. Have you looked at whether you have grounds to have your product or inputs excluded from tariff application at the outset? If it is not excluded, can you obtain remissions or drawbacks of duties paid? These opportunities must be explored now. Delayed action may mean that your organization misses opportunities to exempt itself from tariff application, or incurs financial losses unnecessarily.

  • Review past exemptions and prepare evidence: Exclusions and exemptions are more common for goods of a critical nature, where supply chain disruptions are likely to have detrimental effects. A review of past tariff exclusions may assist organizations with preparing a strategy for seeking exclusions and exemptions from the currently threatened tariffs, and assist with proactively preparing evidence and arguments to support their case, such as evidence supporting the unique or critical nature of the organization’s goods.

9. Engage with us

United States tariffs on Canadian goods and Canada’s retaliatory measures, and their economic impacts, will undoubtably present a major challenge for North American businesses in all industries, and the Canadian economy as a whole. Your organization has the opportunity right now to take proactive action to prepare for the measures as they take shape, and participate in their development. Promptly and proactively taking action to respond to these risks will assist organizations to better mitigate and navigate the challenges posed by these measures.

For assistance in determining how to implement these steps within your organization, please contact the authors. The Gowling WLG International Trade and Customs & Government Affairs teams are closely monitoring these developments and are ready to assist clients in navigating these changes.

For further recent insights from our team on tariffs and United States-Canada trade relations, see: